N.C. Supreme Court Teaches Interesting Ethics Lesson

by Gary Beaver

Rule 4.3 of the N.C. Revised Rules of Professional Conduct provides in pertinent part:

In dealing on behalf of a client with a person who is not represented by counsel, a lawyer shall not:
. . .
(b) state or imply that the lawyer is disinterested. When the lawyer knows or reasonably should know that the unrepresented person misunderstands the lawyers’ role in the matter, the lawyer shall make reasonable efforts to correct the misunderstanding.

On June 17, 2010, in Sisk v. Transylvania Community Hospital, Inc. et al., the N.C. Supreme Court reversed the Court of Appeals and upheld a trial judge who had revoked pro hac vice status for two out-of-state attorneys for their conduct in a matter in another state that was inconsistent with Rule 4.3 (Note: not “a violation of” but rather merely “inconsistent with fair dealings as reflected in Rule 4.3”). The N.C. lawsuit involved a medical malpractice claim. The two attorneys had represented a plaintiff in Kentucky in a similar lawsuit and had sued Abbott Laboratories, Inc. (among others) in that case. Abbott had a consulting expert in the Kentucky case. The out-of-state lawyers contacted that expert as the Kentucky case was settling but before it was dismissed and asked him to assist on a second Kentucky lawsuit with a similar medical issue but in which they had not sued Abbott. However, at the time they contacted the expert, they knew that they were likely to add Abbott as a defendant. The expert had a contract with Abbott to assist in all cases involving the medical issue at stake in both Kentucky cases and the N.C. case. In the second Kentucky case, Abbott moved to disqualify the two attorneys for failing to advise the expert that Abbott was a potential expert and depriving Abbott of its expert. The Kentucky court denied the motion. Abbott tried again to disqualify the lawyers in the N.C. case. The N.C. court granted the motion. The N.C. Supreme Court ultimately affirmed the trial court due to the lawyers admitted intent to keep the expert “in the black” about Abbott’s potential as a defendant.

The ruling is a strong one in favor of lawyers ensuring that they are not misleading potential witnesses in any way about the lawyers’ status and the possible parties in a case. We should all give this decision some thought in the context of all witnesses, not just expert witnesses. Infrequently (but once is too often), you may have seen instances where you know other attorneys mislead or suspect other attorneys of having mislead a witness when they question that witness while investigating a case. This decision may prove to be a big stick to use in such instances.

As for the pro hac vice aspect, the Court of Appeals had correctly noted that an attorney is not subject to discipline under the NC Rules of Professional Conduct if the attorney’s conduct conforms to the rules of the jurisdiction in which the lawyer reasonably believes the predominant effect of that conduct will occur. RPC 8.5. However, though it appears that the predominant effect may have been in Kentucky, the NC Supreme Court held that the trial court did not abuse its discretion under NCGS Section 84-4.2 to revoke the pro hac vice status because it has inherent power to control trials and discipline attorneys and the fact that Rule 4.3 may not apply to this conduct does not limit the trial court from taking some guidance from the rule in exercising such discretion.

Review Your CGL Policy's False Advertising Coverage

by Gary Beaver

In Harleysville Mutual Insurance Company v. Buzz Off Insect Shield, LLC, et. al., plaintiff insurer filed a declaratory judgment action to determine if it owed coverage and a defense for defendants in a federal lawsuit in which claims were made alleging defendants made false ads. The trial court and NC Court of Appeals held that coverage existed. The N.C. Supreme Court reversed on April 15, 2010.

The defendants made insect-repellent clothing and were sued by a competitor for alleged false ads. The NC Supreme Court reviewed the CGL policies’ language and noted that they provided coverage for injury resulting from some false statements made in ads, but not injury caused by false statements an insured makes about its own products. The court then made a detailed analysis of the complaint in the false advertising lawsuit to determine whether the alleged false ads were covered and held that they were not.

The opinion provides a good application of the “comparison test” by which a court reviews the policies and complaint at issue “side-by-side….to determine whether the events as alleged are covered or excluded.” It is also an example of when defendants probably would have preferred that its competitor had overstated its claims, i.e., stated them more broadly rather than with the detail and specificity actually used so that the court might have found that coverage was at least a possibility which, in turn, would have given rise to the insurer’s duty to defend in the federal lawsuit even if a later determination was made that coverage did not exist.

Chapter 75 Does Not Apply to Breaches of Fiduciary Duties Between Partners in N.C.

by Gary Beaver

On April 5, 2010, White v. Thompson, the N.C. Supreme Court held that NCGS §§ 75-1.1 (NC’s unfair and deceptive trade practices act) does not extend to a partner’s breach of his fiduciary duty owed to his partners within a single business. The Court ruled that such misconduct is not “in or affecting commerce.” This holding serves as a reminder that Chapter 75 claims are supposed to be directed at stopping bad business behavior between competing businesses and not designed to regulate purely internal business operations.